Scansource Inc (SCSC) 2010 Q4 法說會逐字稿

Welcome, and thank you for standing by. Welcome to the ScanSource quarterly and year-end earnings conference call. (Operator Instructions). Today's call is being recorded. If anyone has any objection, you may disconnect at this time.

I would like to turn the call over to Mr. Rich Cleys, CFO. Sir, you may begin.

Thank you, Sharon. And thank you for joining us for the ScanSource conference call to discuss financial results for the quarter ended June 30, 2010.

My name is Rich Cleys, and with me are Scott Benbenek, President of Worldwide Operations; and Mike Baur, CEO of ScanSource.

We will review with you the quarter's operating results and then take your questions.

This conference call contains certain comments which are forward-looking statements that involve risks and uncertainties. These statements are subject to the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Statements made in this call are made as of today's date. We may subsequently make these statements available on ScanSource's website or otherwise. ScanSource does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after today's date.

Any number of important factors can cause actual results to differ materially from the anticipated results. For more information concerning factors that could cause such differences, see the company's Annual Report on Form 10-K for the year ended 2009, filed with the Securities and Exchange Commission.

This afternoon the company released our fourth quarter and full-year periods ended June 30, 2010. I will start our discussion by providing overall sales and operating results for the fourth quarter. Later in the call Mike will comment specifically on the quarterly results and outlook for each of our business units.

For the quarter ended June 30, 2010, the company generated worldwide net sales of $582.3 million, which represents a 32% increase in sales over the comparative prior year quarter and a 17% increase over the quarter ended March 31, 2010.

Included in the quarter sales results are revenues from ScanSource Communications - Germany, formally known as Algol Europe, which was acquired November 30, 2009.

Our net sales for the quarter hit a new record for the company and, as well, exceeded our expectations as we experienced good demand in all geographies. In fact, even without the revenue of ScanSource Communications - Germany, the company still would've achieved record quarterly revenues.

On a geographic basis, sales originating from our North American distribution segment increased 28% in comparison with the prior-year quarter. Our international segment grew 49%, and when measured in local currency, grew 62%.

Within our product lines, we experienced a 30% increase in worldwide sales in our POS barcoding and security product categories, over the prior-year quarter. These product categories represent 60% of our total sales for the current quarter, with the remaining 40% of our total sales originating from communications products. Our communications businesses experienced an increase of 35% in comparison to the prior-year quarter.

The company's consolidated gross margin percentage was 9.8% for the quarter ended June 30, 2010, which was lower than the prior-year quarter gross margin of 12.1%. We noted last year that a more normalized margin would have been 10.8%.

Sequentially, gross margin decreased from the previously reported 11%, primarily due to more big deals and a higher mix of lower-margin product lines.

Operating expenses in the current quarter increased 35 -- increased to $35.8 million, compared with $33.5 million in the comparative prior-year period. The increase primarily results from the addition of ScanSource Communications - Germany, which did not exist in the prior year's quarter; changes in vendor programs; and higher bad debt expense.

Operating expense as a percentage of net sales decreased to 6.2% in the current quarter, compared to 7.6% in the comparative prior-year period.

Sequentially, SG&A was approximately $400,000 higher than the third quarter on much higher revenues.

Operating income for the June 2010 quarter increased to $21 million, a 5% increase from operating income in the comparative prior year of $20 million. Expressed as a percentage of sales, operating income was 3.6% in the current quarter, compared to 4.5% for the prior-year quarter, and sequentially was down from the 3.8% for the third quarter of 2010.

Interest expense was $365,000 for the quarter and was flat to the prior-year quarter.

The effective tax rate for the June 2010 quarter decreased to 33.1%, compared with the prior-year quarter of 37.4%. This decrease in the effective rate from the prior year reflects a higher mix of taxable income derived in lower tax rate jurisdictions and reflects the benefit of changes to our international capital structure executed during the fiscal year.

Our return on invested capital was 17.8% for the quarter, which compares to 18.9% for the prior-year quarter.

In summary, the June 2010 quarter had reported EPS of $0.52, versus a reported EPS of $0.47 in the June 2009 quarter. This improvement was due to the increased operating income generated from higher gross profit dollars on higher sales and a more favorable tax rate than the previous year's quarter.

Turning to the balance sheet, inventory turned 6.4 times during the quarter, which was higher than the 5.7 inventory turns generated in the March 2010 quarter, but lower than the 7.1 turns in the comparative quarter last year.

As inventory balances continued to increase during the current quarter, paid-for inventory days were a positive 10.1 days, compared to a positive 17.7 days for the March 2010 quarter and a negative 2.7 days for the comparative prior-year quarter.

The company has continued to maintain increased inventory levels as sales volumes improve and lead times have lengthened. Accordingly, inventory on hand at June 30, 2010, was $346.6 million, versus $312.5 million for the March 31, 2010, quarter and $216.8 million as of June 30, 2009.

There are $62.7 million in checks written but not cleared in the 2010 accounts payable balance. At June 2009 this amount was $45.6 million.

The number of days in receivables, DSO, was 55 days at June 30, 2010, down from 59 days in the sequential quarter and 59 days outstanding for the comparative quarter of the prior year. This was due to increased collections at year end and a favorable mix of customers with shorter terms of sale.

As discussed during previous calls, we continue to be cautious about the impact that the economic environment has on our customers and believe that our underwriting policy is appropriate under the current conditions.

The company has cash and cash equivalents on hand of $34.6 million at June 30, 2010, compared with $29.7 million at March 31, 2010, and $127 million -- $127.7 million at June 30, 2009. The decrease from the prior year is largely attributed to the significant growth in our inventory and receivable balances over the last several quarters.

Total interest-bearing debt remained unchanged at $30.4 million for the June 30, 2010 and 2009 quarter ends.

Mike will now give you an update on our business.

Thanks Rich.

The ScanSource team delivered excellent results for our fourth fiscal quarter and our full year ending June 30, 2010. We exceeded our expectations on the top line and could have delivered even more revenue if we had better product availability. As we have discussed for several quarters, products shortages and longer lead times have negatively affected our financial results.

ScanSource has increased inventory levels for those product lines that have longer lead times, as we are attempting to buffer our customers from shipment delays. We believe ScanSource has gained market share as we have used inventory availability as a competitive advantage.

Our record quarterly sales results represent improving customer demand in all sales units, and a large increase in the amount of large deals or projects.

As a reminder, large deals generally have lower gross margins and lower SG&A costs associated with them.

Now I will comment on each of our reporting segments.

North American distribution includes sales into the United States and Canada, and posted sales of $463.2 million, an increase of 28% year-over-year and 23% sequentially over March.

Our North American discussion will start with our POS and barcode unit.

This sales team delivered excellent results above our plan and achieved the highest quarterly sales since September of 2008. Large deals returned this quarter in our AIDC and our POS business and led to higher revenues, in spite of continuing product shortages and longer lead times. This unit exited June with backorders caused by product shortages that were fulfilled in the month of July.

The POS and barcode unit showed sales growth and gained market share across all product categories, compared to the March 2010 quarter and year-over-year. More customers took advantage of our Custom Configuration Center value-add by outsourcing the staging of POS hardware and software systems to our team in the Southaven distribution center. This allows resellers to reduce their costs and improve their order to cash cycle for sales to retail and hospitality end users.

An area of investment and opportunity for this unit is the rollout of ScanSource social media tools, such as ScanSource TV, ScanSource Community, and SUMO. These tools will generate more business for ScanSource, as customers seek partnerships and business relationships with ISVs, new vendors, and other resellers.

The ScanSource POS and barcode team have continued to make investments in marketing programs to drive demand and build awareness.

Now I will update you on our ScanSource security sales unit.

The security team had a record sales quarter, led by key vendors Panasonic, Axis, Sony and Cisco for video surveillance products. ID card and access control products from Zebra and HID also did very well this quarter. And the networking category of products were led by Motorola and Ruckus.

This unit had an increase in large deals led by a jump in demand from schools during the summer months for video surveillance solutions on campus.

We are seeing lead times lengthen for security vendors at this time and have increased our inventory levels to mitigate the chances of losing any significant sales opportunities.

The security team continues to invest in new customer recruiting activities, including the popular IP workshops that are being held 6 to 7 times each quarter, and attending the Catalyst and ScanSource POS partner conferences.

In the June quarter more customers utilized the Custom Configuration Center to stage and configure cameras and servers for direct shipments to end users.

Next I will update you on ScanSource Communications.

ScanSource Communications posted record sales results for the quarter, with strong growth year-over-year and sequentially from last quarter. The excellent results were led by record sales of Polycom video, voice, and wireless infrastructure products to a growing customer base of AV integrators, service providers, and telephony integrators. Record sales were also delivered by Plantronics headsets and AudioCodes gateways.

ScanSource Communications has increased its marketing programs and sales reach by exhibiting and hosting events at Infocom, UC Summit, and most recently a series of road shows targeting new resellers for the ShoreTel/IBM UC bundled solutions.

Now I will discuss Catalyst Telecom's results.

Catalyst delivered the highest sales results for the quarter since September 2007, driven by large deals and record results on the data side of the business from Juniper and Aruba.

Plus, this is the first quarter Catalyst saw significant Avaya and Nortel data revenues. Avaya Enterprise and SME voice products also delivered solid results, with sequential growth from March.

Catalyst has continued to sign new customers from the Nortel dealer community and began the education and onboarding processes to assist the dealers' quick ramp to Avaya sales success.

Avaya has delivered the product roadmap, and it's heavily Avaya focused in ECG and SME.

We believe the ramp for Nortel partners to begin selling Avaya products is steep but made much easier at our team of sales, technical and business development resources.

Catalyst hosted their annual partner conference in May with the top Avaya and former Nortel dealers in attendance. This conference allowed Catalyst to introduce new programs and new vendors to our customers and provides a forum for high-level executive meetings.

Our second reporting segment is international distribution. Our international business, which includes Europe, Latin America and Mexico, posted sales of $119.1 million, an increase of 49% from last year, and when measured in local currency, actually grew 62% over last year.

In Europe the AIDC/POS segment -- this unit had another excellent quarter, although sales could have been at record levels if certain products had been available. As a result, we delivered orders in July that would've gone in June.

We took market share from other distributors across Western Europe and the UK. Significant sales growth was achieved in Germany, France, Italy and Switzerland. All vendors had strong sales results, with record quarters for those vendors who had minimal supply chain issues.

In Europe we sold to a record number of customers as we rolled out more aggressive marketing programs and improved our visibility in the marketplace.

We had record attendance at our Partner Tours events in Portland, Nordics, Spain and the UK.

ScanSource Europe has launched a successful campaign targeting the healthcare industry, with the support of our key AIDC vendors. We are also investing in additional headcount in sales and business development to support the growth opportunities in the AIDC/POS business.

Turning now to our Europe communication business, this team delivered record quarterly sales results during a quarter where we have begun to improve our customer service by holding higher inventory levels than our competition. As we add new customers and they realize the advantages that ScanSource Europe delivers versus the competition, we believe our market share will continue to increase.

During the June quarter we gained market share with Avaya, Juniper and Extreme, and achieved record sales results with each of them.

In the UK the team is on the road with the Partner Tour, recruiting new customers and conducting reseller education. We have recently added Extreme products to our UK product portfolio, and we'll be launching this line to our customers in the September quarter.

In the Germanic region we organized and invested in Avaya new products events and supported our customers' end-user marketing campaigns to help drive demand. ScanSource has been appointed an Avaya ECG learning partner in Germany through our university program offering. This will enhance our value-added offerings and drive new resellers to ScanSource.

In Latin America our sales results were very good and, again, would've been much better if certain vendors' products had been available. Supply chain issues that we have seen in other geographies are impacting Latin America now.

In Mexico, our largest sales reason, we experienced delays in some projects as end users pushed orders to the September quarter.

As in Europe, we believe we have gained market share through more aggressive sales and marketing efforts.

During the quarter we also began selling products from several new vendors -- Polycom, AudioCodes and Extreme.

I want to thank all of the ScanSource employees, our customers and our vendors for a great year in fiscal 2010.

Now we will conclude this part of our call with closing comments.

We believe total revenues for the September 2010 quarter could range from $555 million to $575 million, and our earnings-per-share -- EPS -- could range from $0.47 to $0.50 per diluted share.

At this time we'll be glad to answer questions.

(Operator Instructions). Reik Read, Robert Baird.

Mike, maybe you could comment a little bit on the -- further on the product shortages. It just seems like you are citing it really in almost all circumstances. Is that getting worse? Is it staying stable? And what do you think the next, say, six months will bring to you?

Well, I think we've been talking about it now for a few quarters, and our efforts to mitigate the impact to our customers has been pretty good, meaning that our vendors have responded well for those critical customer installations that had to happen last quarter.

So I would say this, I think working very closely with our vendor partners we have been able to do our best not to lose any business. We've been able to work with our resellers to try to take those deals that can wait a few weeks or a month and put those in a different order cycle.

As a result, as I said in my comments, some of the shortages that we had at the end of June, when we got product in in July, we were still able to retain some of that business. And that same dynamic happened in the March quarter.

And the reality is that the lead times have also increased across the board, so the shortages are one thing that I think the manufacturers are starting to get a good handle on, and they're seeing -- we are seeing improvement.

We are not sure how this is going to shake out in total over the next quarter, so we are still a little nervous about our ability to satisfy all the demand that is going to come our way this quarter. So it does make us nervous when we are not as in control of our inventory stocking levels as we normally would be. But clearly every vendor we are talking to is aware and is working closely with us to mitigate any loss of orders.

Okay. And then maybe you could talk a little bit about the big deals. It sounds like they really came back in almost all your areas. Are there any specific vertical markets where they really started to occur? And can you maybe talk a little bit about why it is occurring, what the source of that is?

Well, it was a little bit of a surprise to us in some areas. I would say, in the communications arena, that part of our business, the data side of that business came back very strong. And I think, as I said, we had some record levels of performance.

We have been working closely with Avaya and their new Nortel data products. We really only started selling them seriously in this quarter. So that was all pretty new business for us, which was great.

And then as I said, we had great Juniper and Aruba results as well.

So some of that was because there were some big deals in that data world, and I'm not sure exactly why those came up. I've heard other vendors and other companies talk about data being one area that IT investments are being made, but I can't be sure of that, because for ScanSource we also saw in our barcode and POS business a resurgence in some retail point-of-sale deals.

That probably is the most pleasing one to see and also the one that we have been waiting a long time to see is some large point-of-sale deals like we had a few years ago. So I would say that one was the most surprising because we've been hearing that there's deals out there, but the end users weren't willing to pull the trigger on anything of any size.

So it's really a data and a POS story from a -- from the large deals, from a majority standpoint.

Okay. And then just quickly back to the data side of things -- it seems like Cisco has suggested that they are starting to see a little bit of softness as of the July time frame. Is that something that you are seeing today, or is just the model that you have letting you get through that?

Well, I think what we are seeing in our business, and for sure through June, is that we are taking some market share. So from our perspective, we are out-executing some of our competitors, we are taking some share. I think as we look at the forecast for this quarter and we think about July, our forecast reflects the fact that we know what we know through today, through yesterday's shipments.

But we are not sure what's going to happen the rest of this quarter. And a lot of that hinges on a couple things --

Historically, as we all know, Avaya has had a strong September quarter, their fiscal year end, and so that always brings a lot of opportunity for us in this quarter.

Secondly, these -- probably less Avaya -- but these other vendors that have had product shortages, it's a question of what will they will deliver to us by the end of the month? -- end of the quarter? -- I should say. So I'm more focused on that than I am on -- what are the large enterprise end users doing? I don't believe that has as big an impact on our business right now.

Okay, great. Thank you, Mike.

Andrew Abrams, Avian Securities.

Just a quick question. You said something on Mexico, and you -- did you say push-outs or --?

I did. Yes -- this is Mike. Yes, I said we had some specific projects that our resellers told us their end users pushed those orders out from the June quarter to September, yes.

Oh, June to September, okay. But they weren't cancellations, they were just push-outs?

That's correct.

Okay. And on the Nortel business, are you beginning to feel like you're getting to a level that is going to be normal? Or are you still in the -- you've got another two quarters or so to go to, before it builds up to where you think this will normalize out?

Well, I think with the Nortel business for ScanSource -- and it's sold through our Catalyst unit -- our challenge has been that -- for us it's new products, and we've got to get our traditional Avaya base of customers to get trained and educated and to help them be successful.

We are also out, as everyone knows, recruiting existing Nortel resellers who are selling Nortel day-to-day to purchase through Catalyst.

So we are doing -- we are having to train our existing base of guys, and we are trying to bring over some new customers.

And we had our Avaya/Catalyst conference in May, as I was indicating, and we had a substantial number of new customers show up. I think it was over 100 at this conference, and many of them are former Nortel customers that were not buying from Catalyst. So we feel like we've started the process but we are nowhere near where we need to be or expect to be from a run rate.

Gotcha. And just one last on the POS business. I know this has been a long time in coming for everybody. Does this feel to you like we are starting to see some kind of extended recovery? Or is there a lot of pent-up demand here that is just taking product and that there is no feel for things going forward after that?

Well, I think that your comments are the same comments we are having in our discussions when we have to figure out what in the heck are we going to forecast. We listen to our teams; they do a review of our top customers and get their sense for the current projects that they are quoting. Then we talk to our vendors and say, what you guys hearing in the field? So we try to compare notes between our vendor field guys that are working the larger opportunities, our resellers, and then we take a look at it and quote -- internally sign up for a number.

I would say it is as hard now as it's ever been, probably harder with the shortages as well, because shortages also exist in the POS business, by the way. So once we are getting some of these orders, we can't even be sure we are going to ship them in the quarter we get the final purchase order. So that's what makes this more difficult than I have in a long time to give a quarterly forecast.

Gotcha. Okay. Well, thank you very much.

Chris Quilty, Raymond James.

Shifting to Europe, you did quite well, especially given the backdrop of some of the stuff happening in the quarter with the European bond crisis. Did you see any real impact from that, or any lingering follow-on effects?

So I'll let Rich talk about maybe the economic health of our customers, because historically -- talk a little bit about their ability to borrow.

But from our perspective on the overall business, I would say, Chris, the overall theme of our business right now is we are taking some market share. What we've learned -- and this is a historical ScanSource story -- is when people have trouble finding product, that is when you see us improving our market share, because we are going to err on the side of having more inventory than not. And I think it dramatically helped us this past quarter that we had products when others didn't.

One thing that happens when things get tight, product get tight, is customers who maybe haven't called us in a long time are calling us, and they are interested because they can't get product from their smaller, more regional, country-specific distributor. So this fragmentation that exists in Europe works to the disadvantage of all of those small regional guys.

The small regional distributors, they depend on the vendors shipping to them in two or three weeks. Now that lead times have gone out to 12 weeks, I think we are in a much stronger position to take market share.

And Rich may want to comment, though, on the economic side -- if that answers your question.

Yes, and on the economic side, we did have good performance overall on our receivable portfolio, which would include Europe, at the end of the quarter. But we still remain cautious, and there are certain countries that we are more cautious about in Europe because of the economic environment -- and also in Latin America, frankly. So we continue to underwrite in a similar way that we have all along, but there are some countries where we are a little more cautious about underwriting than others.

Okay. And that was my next question. You've kind of answered it already. But looking over either the last six months or the last two years, what have you seen in the trend of bad debt expense and the amount of credit you are extending?

The bad debt expense that we'll report for the current year will be significantly up versus prior years. We are going to be about $4.4 million higher than prior years. In the prior years we'd have about $6 million, $6 million and a fraction of write-offs. So that is a much bigger number.

As far as our underwriting go, though, we've got a pretty robust credit team in all of the geographies. We get a lot of information from our customers, and we are still utilizing the same basic underwriting tenets that we've used in the past. We feel pretty good about those criteria that we use to underwrite our customers.

Okay. And a final question for you, Rich -- with the Algol acquisition and the integration, as you look out into the first quarter and I guess the balance of the year in your operating expenses, should we expect in the sales and marketing line any significant changes, either up or down, with the kind of rate you've shown over the past three quarters, in a $35 million, $36 million range?

Oh, you mean the SG&A?

Yes.

Yes. Right now we are looking at -- we are comfortable with our SG&A. That can fluctuate if we do have some problems in the bad debt area. If you look at our quarters this last year, it was -- there were some peaks and valleys in the way that we had to record bad debt. So bad debt is one item that could cause SG&A to change. But overall our spending is in good control.

And I would add to that, Chris, the other area of spending that we will continue to do at this stage is in our European communications business. As you know, that's still new ground for us, with the acquisition. And also still in our security business.

So I would say those are still two areas of investment from an SG&A perspective that we think will pay dividends to us down the road.

Okay. You've talked in the past about the security business taking longer to get over the hump than you would have hoped. What has the past year and a half of economic crisis done for you there in terms of either slowing the process or accelerating it the way it has with your more traditional markets?

Well, it's interesting. I don't think the economic impact has been seen by that team. They don't -- they wouldn't be able to see the impact, to be honest. We are in a mode still of -- we've built a new business model in that business that's kind of a hybrid between the small, regional distributor of electronic security products and a couple of these large, multinationals that have drive-up warehouses. So we have got this new model that's different.

And I think the fact that we've been able to operate at maybe lower margins from a gross margin line than the traditional security distributor, because they have all this infrastructure, has given us the ability to come in there and take some market share, frankly.

The second thing that's going on there that's, again, insulated from the economic issues are this new technology shift to IP. So people have determined that there is a better return on investment if they buy new, IP-based cameras and maintain through service agreements and all the other costs associated with traditional analog technology. So I think that's why we are insulated so far from the economic environment.

Great. Thanks, guys.

(Operator Instructions). Tony Kure, KeyBanc.

A couple of quick questions. The bad debt you called out as an impact in the fourth quarter, could you maybe size that for us? And is that an increase from the third quarter that you saw? Or is it on the same level as the third quarter bad debt expense?

Our bad debt expense for the fourth quarter was better than the third quarter. When I say better -- less than. That actually -- versus our expectation, we had a better quarter in bad debt.

Okay. So is that then -- is what's factored into the first quarter just sort of a flat bad debt expense?

We would normalize our bad debt based upon the full-year experience of 2010.

Okay. And in that --

That would say that we've put some more in our forecast.

Yes. I guess that's sort of the next question. You mentioned the current year is about $4.4 million higher than prior years. By "current year," did you mean fiscal 2011 or fiscal 2010?

Fiscal 2010. So when you see our 10-K report, you'll be able to look up the -- at the schedule and see that change.

Okay. So that was about $4.5 million higher than 2009, and then you're factoring in a higher expense --

I would be factoring in a similar expense for 2011 than what I've experienced over all in 2010.

Gotcha, okay. And then just looking at the revenue guidance, at the midpoint it's about a sequential decline of about 3%. Just going back over the last several years, I've got an average of, I don't know, mid-single digits, maybe 5% or 6% sequential increase in the first quarter historically.

Is what's driving that -- well first, is my assessment correct that first quarter is normally a sequentially strong quarter? And if so, what is driving the decline here? Is it more the shortages? Or is it -- or is more -- were there some pull-throughs? Maybe just help us out there.

Hey, Tony. It's Mike. I think two things. One is the shortages that we -- well, we definitely got a lot of help in June. Things came in. If we'd have missed some of those receipts at the end of June and if they'd have moved into July, we'd have had a different story for you today.

So knowing what I know through August, today, we have some expectation for some shortages still this quarter. Okay? That is in our forecast. But that could change. The lead times, see, have also lengthened at the same time you're having shortages. So we are having to manage really a dramatically different landscape from a purchasing view. That's one item.

Number two is that creates more uncertainty than we've had in years past, in a long time. So the second thing is, this is traditionally, seasonally, the Avaya big quarter, and we are just saying we are not sure that it's going to be as big as it used to be. Last year, even, it was not as strong a quarter as it had been historically.

And so I think some of that end of their fiscal year push may have changed over the last two years, three years since they went to -- they are privately held now. And so that's baked into our numbers too, is that we are not expecting as big a surge that we used to have in the September quarter from Avaya.

Okay. So from the Avaya standpoint then, it's more their change in their model more recently, versus maybe some underlying organic demand that is not as strong as typically. Is that a fair assessment?

I think that is fair, right. So they traditionally have had compensation plans that gave a lot of incentives for stuff by the end of September. I think they have gone to more -- we got to have every strong quarter strong, not just September. So I think they're out there trying to engage every quarter.

Okay, thank you. That's helpful.

Ajit Pai, Stifel Nicolaus.

A couple of quick questions. I think the first one is just your commentary right now on receivables and on inventory. You seem to say or suggest that the levels at which they are -- they've been going up quite steeply recently -- should start stabilizing, which would suggest that also that your free cash flow should start accelerating after this point. So if that indeed is the case, could you give us some color on uses of cash on a go-forward basis?

Even with this climb in inventory, you're back to a net cash position, and every year and a half you've -- approximately at least the past few years have been making an acquisition. So could you give us what your appetite for acquisition is like right now, and also what -- is it more on the international side, like the prior acquisition, or what does the pipeline look like?

Well, we've -- we are always looking for geographic or strategic acquisitions. Traditionally we've done one or two a year. So we are always in the market looking for those things.

We have been able to absorb the acquisitions without taking on debt in the long run. So you're right; we've been able -- as growth has slowed down, we've been able to generate cash flow, and that's helped us build our business through these strategic acquisitions.

So we would still be interested in those kind of things to augment our business.

And is the pipeline fairly rich right now? Are folks more open in this kind of economy than they have been over the past couple of years?

I would say this -- this is Mike -- I would think that's what you would expect, but sometimes people think very highly of their business, and they are not willing to sell it cheap. So we all know that there's a balance between companies that have cash and people not wanting to sell below a number that is in their minds.

So we always go through that, but I -- our acquisitions have traditionally been fairly small companies, and so we've been able to pay fairly for them and generate good returns for the company.

So we will -- we are always looking at and looking out for opportunities like that.

Right. Historically you've talked about the receivables and inventory being -- your investment in these two being a competitive differentiator, and you just talked about how it has helped you in the most recent quarter or the past couple of quarters with the shortages. On a go-forward basis you're saying that the current levels as a percentage of sales should be roughly okay, which means that you're going to be generating a lot of cash. Is that a fair assumption on a go-forward basis?

If the growth is slower, yes, we should be able to generate some cash flow. Of course, that's -- when you look at the quarters, that will be affected by the timing of the payables. This quarter we actually had some benefit on the payables. We were about three days higher on payables than we were quarter before. So when you look at those snapshots, there could be some little bit. But the trend would be to generate some cash flow.

Right. Then how would you prioritize the use of that cash? Because your valuation has come down over the past five years. Your revenues are up 60%. Your earnings are up materially. So -- and your stock price hasn't -- you know what I mean? So how would you prioritize the use of cash? Are you -- would you consider a share buyback? Would you consider -- or you still think the best investment is within the business and the acquisitions?

I think so far our Board has decided they still want to look at opportunities where we can get stronger than typical margins in these specialty technology businesses, as long as we can find opportunities like those that we could acquire, and/or start in a new area, that we might be a new player.

We are not opposed to a greenfield opportunity in some of these markets. We've never said that is out of the question. We did that in security, if you recall -- didn't make an acquisition -- probably one of the reasons it's taken us longer than I would have liked, because we started that one without an acquisition.

So yes, I think we have, we think -- and I think our Board agrees -- right now other places that we can use our cash today. But we would always look at -- if we don't have those, look at some other way to satisfy shareholder return, absolutely.

Got it. And then the last question is just the security business, I think you've talked about it a bit on today's call and provided some color as to the fact that it's a record quarter for security. But as a percentage of the business, is the time -- I think you said you'd start calling it out separately once it crosses 10% of overall revenue. Are we anywhere close to that? Do you think it's going to be a 2011 event or any time in the near term?

Well, a couple of things. One is I am trying not to tip off my competitors, because this is an interesting market where we have entered a place where there are lots of distributors -- and there's a couple of big ones -- and there's been some acquisition activity going on there. We are trying to not have to talk about it publicly as long as I can. We have indicated that we will break it out at a certain level.

The reality is, our other businesses have started growing well at the same time as security. So security has got to really push hard to catch up with the rest of our business right now.

But I would hope that we see continued success there in security and that we will be at that level that we will need to talk about with our investors. But we clearly feel like it still is a good business, that it's profitable and that we are growing it.

You are not averse to starting a fourth -- providing a fourth leg to the stool before security becomes 10%? If you find a new opportunity that's interesting, it sounds like you're open to entering a new opportunity.

We would consider it. I would say it wouldn't be clearly the priority. It would be a lower level. The greenfield opportunity I was really referring to was maybe moving to another geography that we are not already present with just our existing products, because we are still not in Asia-Pacific, as you know. And there's a couple of other areas even in our existing regions that we don't have a significant presence yet. So those are the areas that probably have a priority over a new technology.

Got it. Thank you so much.

(Operator Instructions). Chris Quilty, Raymond James.

Rich, just a quick housecleaning. Did you give a projected tax rate for the quarter or year?

I did not, but I would project for next year to have a similar tax rate, that we got in 2010. So something in the neighborhood of 35.5% or maybe a little bit north of that, but south of 36%.

Okay, very good. And just to clarify, I know you don't provide specific guidance, but given -- at the margin level -- but given what you guided to on EPS, and all other things equal, it looks like your gross margins are going to pop back up to that mid to high 10% range, which I assume reflects a little bit better mix in small or large deal?

I would say maybe from this point, the operating margin, we are looking at somewhere around 3.6%, 3.7%, that kind of number, with that tax rate that I just gave you. So depending upon the mix of business, if we have a similar mix of business that we had this quarter, I don't think it's going to go back to that 10.3% kind of traditional margin, it will be less than that. But that is, again, the mix with the data products and some of the larger deals that we are seeing nowadays.

Okay, great. Thanks, guys.

(Operator Instructions). I show no further questions at this time.

All right. Well, thank you, Sharon.

And thank you for joining us. Our next conference call to discuss the September 30th quarterly earnings call is expected to be October 28, 2010.

Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.